Aided by a favorable business mix, portfolio premiumization and supply chain agility, ITC delivered strong performance for its non-cigarette FMCG segment in the fourth quarter last year. Despite inflationary headwinds, the segment saw an Ebitda margin increase of around 70 basis points year-over-year to 9%.
The non-cigarette FMCG business had posted an Ebitda margin of 8.1% in the fourth quarter of fiscal 2019-20, the pre-pandemic year. Ebitda grew by 46.5% to 375 crore from January to March 2022 from 256 crore in the same period of 2020. Year-on-year Ebitda growth of 22.5% for Q4FY22 was also well ahead of its peers.
ITC’s non-cigarette FMCG segment is now at scale, driving structural growth and improving margins, HSBC Global Research said in a note Tuesday. “We believe this trend will continue and further enhance the attractiveness of FMCG-Others in ITC’s overall value creation,” HSBC said in its note. During Q4FY22, non-cigarette FMCG business recorded 12.32% YoY growth in revenue to 4,141.97 crores, while operating profit recorded 25% YoY growth at 235.99 crores. HSBC said the non-cigarette FMCG business is “a growth engine” for the cigarette-to-FMCG-to-hotel major. “We remain bullish on this segment,” he added.
According to Kotak Institutional Equities, the conglomerate offers decent earnings growth visibility, driven by the recovery in cigarettes and relatively stable performance in consumer products. Kotak, in its report, said strong FMCG margin growth in the fourth quarter, despite inflationary pressure, was due to strong growth in Discretionary/Out Of Home (OOH) categories, resilient performance in Foods from staples and ready meals, driven by robust growth in Aashirvaad, Sunrise spices, and bingo snacks. YiPPee (instant noodles) has witnessed the normalization of demands.
Although there was demand volatility in the hygiene portfolio, it was still significantly above pre-pandemic levels. However, the stationery recovery, helped by the reopening of schools and colleges, was still below pre-pandemic levels.
For the fourth quarter of the prior fiscal year, the company’s revenue from the cigarette business grew 9.96% year-on-year to 6,443.37 crore, with volume growth of 9%. The company said there had been a “broad and robust recovery” in cigarettes despite the disruption from the third wave. Volumes exceeded pre-pandemic levels. The operating profit of the cigarette segment increased by 12.21% year-on-year to 4,114.27 crore.
“Cigarette volume growth was approximately 9% (2% CAGR over three years) and with a stable demand environment, we expect this trajectory to improve in the coming quarters,” said HDFC Securities. in its recent report.
The company said that after a difficult 20-21 fiscal year, and despite repeated disruptions over the past fiscal year, the cigarette business “has gradually recovered” thanks to improved mobility and the easing of restrictions, outpacing pre-pandemic levels in the second half of the year. . “The company has effectively leveraged institutional strengths, digital technologies and lessons from previous waves to respond with agility to all nodes of operations,” the cigarette major said, adding that it has realigned operations supply chain to meet market requirements by strengthening direct reach to target markets through all traditional trade channels and increasing the dealer network to effectively serve rural and semi-urban markets.
HSBC Global Research, however, said its scenario analysis suggests that even with a bullish scenario for cigarettes (which is fraught with volume risks and regulatory uncertainties), the overall upside still looks very limited. “Except for the current rebound, cigarette volumes are structurally down and we believe are unlikely to change,” he said, adding that even price elasticity (after years of relentless price increases to fuel EPS growth) declined, limiting cigarette EBIT growth. makes cigarettes (85% of global revenue) a drag on global multiples, creating the illusion of value.
Notably, the diversified conglomerate increased its Ebit margins by around 80 basis points year-on-year to 74.2% for its cigarettes business during the fourth quarter last fiscal year.